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Notional Rent: How to calculate it and how much tax do you pay?

Notional rent is the rent which you are presumed to earn from a residential property even if you don’t happen to actually earn any rent. This rent is taxable as per the Income Tax Act, 1961. This article focuses on the various aspects of notional rent and the applicable tax.

What constitutes notional rent?

Usually, people either self-occupy the house or rent it out. Earlier, a person was allowed to declare only one house as self-occupied and pay tax on the notional rent earned from the second home, even if it was self-occupied.

However, interim finance minister Piyush Goyal announced during the Interim Budget tabled in the Parliament on 1st February 2019that notional rent earned from the second home will be exempted from taxation from FY 2019-20. In other words, you can claim two houses as self-occupied and need not pay any taxes on them from the next financial year.

Why tax the notional rent?

The idea behind levying a tax on a notional basis was to encourage people to let-out their vacant houses. This would augment the supply of housing options for tenants and will also serve as another avenue for revenue generation. Several working professionals, working in different parts of the country, look out for homes which they can avail on rent.

How is notional rent calculated?

The notional rent is determined on the basis of the annual value of the house. Annual value is the expected rental value of the house in the next year.

The annual value is calculated taking into consideration the fair rent, standard rent and municipal value. Fair rent is the rent that a similar house can get in the same or similar location. Standard rent is the rent fixed for the house property under the Rent Control Act. Municipal value is the rent amount that is estimated by the Municipal Corporation of the area.

Given the figures of fair rent, standard rent and municipal value, the annual value is such calculated that the higher value between ‘fair rent’ and ‘municipal value’ is taken as the expected rent. Then the expected value is compared with the ‘standard rent’ and in this step, the lower value is considered. From this value, municipal taxes are deducted, and the amount thus arrived is the annual value of the house.

How much do you actually pay?

Section 24 of the Income Tax Act allows a tax deduction of 30% over the annual value. The rationale behind this deduction is to discount the expenses you bore for the maintenance of the house property.

Also, if you have taken a home loan against the property, the interest payment for the same would also be eligible for tax deduction.The figure arrived after making all the eligible deductions, is taxed as per the income tax slabs.

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